What happened
Shares of electric vehicle ecosystem participants Albemarle (ALB +0.75%), ChargePoint Holdings (CHPT 2.12%), and QuantumScape (QS +2.75%) fell hard this week, declining 11.9%, 12.2%, and 10.9%, respectively, according to data provided by S&P Global Market Intelligence.
While none of these companies reported earnings or had material financial disclosures this week, there were some bearish analyst comments on specific companies as well as the auto sector in general from Wall Street analysts. In addition, Tesla's (TSLA +0.91%) first-quarter deliveries data released last weekend appeared to disappoint more hopeful investors in the EV space.
NYSE: ALB
Key Data Points
So what
None of these three companies is an actual electric vehicle manufacturer, but each is a part of the EV ecosystem. Albemarle is a lithium processor, the key material in lithium-ion batteries that power EVs. QuantumScape is pioneering research in solid-state batteries, a newer technology that has higher density and stability than today's lithium-ion batteries but has not yet been commercialized. Meanwhile, ChargePoint Holdings is the global leader in charging stations and would benefit from the continuation of EV adoption and usage.
Unfortunately, this wasn't the best week for EV-related names. Tesla released its first-quarter deliveries last weekend. Total deliveries were up 36% year over year and 4% quarter over quarter, landing in between various sets of analyst estimates. Still, the 36% growth and 16% annualized quarterly growth likely underwhelmed some, especially as Tesla cut prices heavily toward the end of the fourth quarter. CEO Elon Musk had also previously set a 50% annualized growth rate for the company, so it's likely 2023 numbers will be significantly below that. Tesla's stock fell in response.
Things didn't get any better on Wednesday for EV-related names when Albemarle received a downgrade to "Sell" and a price target cut from Bank of America analyst Matthew DeYoe. DeYoe pointed out that the curve for processed lithium prices is inverted to a great extent right now, with Chinese lithium carbonate prices at $33,400 per metric ton today, but with forward August contracts pricing at $23,000 per ton, likely in anticipation of macroeconomic weakness.
Macroeconomic weakness was also cited by analysts at UBS that same day, who predicted oversupply across the entire auto industry in 2023. Autos have been in short supply since the pandemic, and unlike consumer electronics and other goods, that short supply has continued even over the past year due to supply chain constraints, specifically in semiconductors.
However, the team at UBS sees supply chains normalizing this year just as the economy goes into recession, which could lead to the past year's shortage turning into overproduction and a glut later in 2023. The team notes that price cuts are already happening in the EV space and could spread to internal combustion cars as well. UBS predicts about 85.8 million vehicles will be produced this year, but only 81 million unit sales.
All of these developments obviously aren't great for Albemarle specifically, but they also weighed on sentiment for both ChargePoint and QuantumScape. Unlike the profitable Albemarle, the latter two are very unprofitable. QuantumScape is actually pre-revenue, burning cash in pursuit of its solid-state technology, which isn't proven out yet. Of note, QuantumScape claims its $1.05 billion or so in cash is enough runway to get the company through the second half of 2025.
In addition, while ChargePoint just wrapped up a year in which revenue surged 94.2%, its operating loss also increased from $265 million in 2021 to $342 million in 2022. ChargePoint is a low-gross-margin business and will likely need to generate losses for a few more years as it scales up.
That means both ChargePoint and QuantumScape are highly vulnerable to both recession and higher interest rates, as they may need to raise more capital at some point. While some may be hoping the Federal Reserve pauses its interest rate increases, several Fed officials spoke this week due to the regional banking crisis, indicating they still see a higher ultimate federal funds rate as necessary to quell inflation.
That's not great news for unprofitable growth stocks and is likely why QuantumScape and ChargePoint continued to fall this week after initially rising to begin the year.
Now what
Electric vehicles no doubt have a bright future, but the outlook this year is highly uncertain. EV OEMs are cutting prices amid fierce competition, just as the Fed's rapid interest rate increases are having an effect on customer demand.
Until the murky picture of inflation and the economy clears up, both cyclical auto stocks, as well as unprofitable growth stocks, are likely to see volatility. Many EV-related stocks are actually a combination of both, making them difficult buys as the economy moves toward a potential recession.
